A Nation of Pack Rats Needs Room to Stow

THE self-storage business started only about three decades ago in the Southwest, largely in response to an influx of retirees who were downsizing and looking to stow away excess belongings.

Today, it is a $145 billion industry, with 45,365 facilities nationwide and counting -- or, as its trade association breaks it down, a business large enough to provide nearly seven square feet of rentable space for every person in the United States.

But it is also an industry in transition, evolving from a sector that is highly fragmented -- dominated by thousands of mom-and-pop operators -- to one that is maturing and consolidating. And it has been capturing the attention of Wall Street.

Investors, seeing further growth ahead in a nation of pack rats, have been snapping up real estate investment trusts that hold large portfolios of self-storage properties. REIT's, which disburse most of their profits as dividends, now own an estimated 10 percent of self-storage facilities across the country.

There are five publicly traded REIT's in the self-storage sector, though that number will soon drop to four: Public Storage and Shurgard Storage Centers, which agreed recently to merge their operations, as well as Sovran Self-Storage, U-Store-It Trust and Extra Space Storage. Together, they outperformed most other kinds of REIT's during the first quarter this year.

This year through Thursday, the self-storage sector returned 17.67 percent. That was on top of a return of 26.55 percent last year, according to the National Association of Real Estate Investment Trusts.

By contrast, the average return for all equity REIT's was 14.48 percent this year through Thursday, and 12.16 percent in 2005, the trade group said.

Self-storage "has really had a great run," said Paul E. Adornato, a financial analyst at Harris Nesbitt, the investment firm. Mr. Adornato recalled how a few years ago the sector suffered from growing pains as overbuilding caused rents and occupancy rates to fall off. Occupancy rates have ranged from 80 percent to nearly 90 percent and are now hovering around 85 percent, according to industry estimates.

But while market watchers have been pleased with the turnaround, some remain cautious about what lies ahead.

"I think the sector will continue to have decent results, but I don't think this year will be as robust as 2005," said Michael Knott, an analyst at Green Street Advisors. Like some other analysts, he said he believes that share prices of self-storage REIT's are becoming too rich. Indeed, most are now trading close to their 52-week highs.

Part of the reason for the run-up has been consolidation. Investors have been bidding up shares in anticipation that further mergers or acquisitions may occur.

The largest in the sector was announced just last month, when Public Storage agreed to buy Shurgard in a deal valued around $5 billion. The combination of these REIT's, the biggest in the category, would create the largest self-storage company in the world, with more than 2,100 facilities in 38 states and in Europe.

Last May, a unit of General Electric agreed to sell its Storage USA unit for $2.3 billion in cash to a joint venture of Extra Space Storage and Prudential Real Estate Investors. And throughout last year, U-Store-It Trust bought a total of 146 facilities around the country for $547.9 million.

Analysts have called the Public Storage-Shurgard merger, which is expected to close in the second quarter, a good fit -- even though some have said that Public Storage overpaid for Shurgard's assets. Because of overlapping markets, there should be substantial saving in management and advertising costs after the merger, analysts said. At the same time, they said they expected that Public Storage, which has no overseas operations, would benefit from Shurgard's strong presence in seven European countries.

Michael R. Grupe, a senior vice president for research and investment affairs at the National Association of Real Estate Investment Trusts, acknowledged that many recent acquisitions "have been done for some pretty substantial premiums." But, he said, this shows that "the value of the underlying assets is perceived to be higher than what is reflected in the share price."

Louis Taylor, an analyst at Deutsche Bank, for one, says he thinks that Public Storage's share price, now around $80, still has room to grow, and he recently upgraded his ratings on the REIT.

Paul Puryear, an analyst at Raymond James & Associates, was also bullish. "The stock prices are rich," he said of Public Storage and other self-storage REIT's, "though I would point out that the earnings growth looks strong."

But Mr. Adornato suggests that investors may want to consider taking profits now. He said that self-storage REIT's -- and Public Storage in particular -- could be susceptible to future economic downturns and overbuilding. (The growth rate for new facilities, in fact, has been about 9.5 percent a year for the last two decades, according to the Self Storage Association, which says that nearly 4,000 were added in 2004 alone.)

Mr. Adornato said he was also concerned about "a noticeable uptick in the level of discounts being offered to new customers." According to a recent Harris Nesbitt survey, 43 percent of self-storage providers were offering one month of free rent in the fourth quarter of 2005, up from 22 percent in the quarter a year earlier. (The average rental lasts six to nine months.)

"That could be a good leading indicator of where the industry is heading," he said.

Still, many real estate experts say that as long as the economy continues to grow, so will demand for self-storage. For one thing, economic expansion often leads to increased hiring, which will cause some people to relocate for new jobs; such transitions often require the renting of storage space. In addition, more people may be able to afford big-ticket items that take up much of that space.

Of course, demand for self-storage is also created by life's passages: marriage, divorce, retirement, even enlistment in the military.

John Kriz, managing director of real estate finance at Moody's Investors Service, says he sees growing demand, too, for self-storage by small businesses, particularly those that operate online. "Those tenants are relatively stable; they rent for longer than just a season," he said. (About a third of all units are now rented to small businesses, according to the Self Storage Association.)

MR. KRIZ has another reason for his favorable view of self-storage as an investment: storage sites are relatively inexpensive to maintain.

"When you have an apartment or office building, you have to put in new rugs or paint," he said. "But with self-storage, there's not as much to do -- you sweep it out and maybe paint the floors and put in a new light bulb."

That apparent ease of operation, though, concerns Mr. Puryear. "You can build these facilities for $2 million to $3 million -- there are not a lot of moving parts -- and that attracts a lot of small investors," he said. "But that's a problem from a supply side."